QUOTE(joway93 @ Feb 11 2019, 07:14 PM)
Hi gurus, my friend and I recently had a discussion on why businesses would want to borrow money from the bank with such hefty interest rates. Obviously we couldnt convince ourselves that getting a loan is good. What do you think? For example, why would a "mixed rice" store want to borrow money from the bank?
When you forked out your own capital, let's say RM100k, to run the biz. Assuming the ROI per annum is 30%, you'll get RM30k profit.
Now, let's say you borrowed RM1m to run the biz & assuming ROI is the same, you'll get RM300k profit. What's the bank's hefty IR? Assuming 10%, then out of that RM300k profit, the bank will take RM100k in IR & RM200k is left for you.
So you wanna keep your own RM100k personal use & use other people's money to earn RM200k? Or do you prefer to use your own RM100k to run the biz & earn RM30k? Earn RM200k or earn RM30k?
Anyway, that's all theoretical talks & assumptions. There's also the possibility of:
- the biz go bust & you owe the bank
- the biz barely breaking even & you're struggling to pay the loan
- the ROI increase tremendously due to economies of scale & you earn even higher
Also, do note that the bank won't lend you money if your biz hasn't been profitable for few years.